INTRODUCTION: Last week Warren Buffett released his 2022 letter to Berkshire Hathaway shareholders. The letter contains little financial information, but there are lots of financial advice for his shareholders. The annual general meeting (AGM) will be hosted by Buffett (92) and Charlie Munger (99) in Omaha, Nebraska) on May 5-6. Buffett bought Berkshire Hathaway, a failing textile company in 1964, and then began using it as a platform to invest in other companies and industries. When it comes to investing, Buffett is still a genius.

PERFORMANCE: The performance of Berkshire Hathaway since 1965 to 2022 (58 years) is remarkable. The compounded annual gain since 1965 is 19.8%, exactly double the annual gain of 9.9% of the S&P 500. This may seem petty, but the overall gain over 58 years was 3,787,464% (3.7 million percent), compared to the 24,707% (24.7 thousand percent) of the S&P 500. The price of a single Berkshire Hathaway share today is $473 256.12, around R8.5 million per share.

INVESTMENT STRATEGY: Warren Buffett once said in a letter to his shareholders, “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” This has not always been his strategy. Buffett’s investment strategy has changed since he met his business partner, Charlie Munger, in 1958. Buffett used to be a deep value investor, a strategy he learned from Benjamin Graham, the father of value investing. Munger convinced Buffett to also consider growth, a strategy he, Munger, adopted after reading the book, Common Stocks and Uncommon Profits, by Phil Fisher. Fisher is one of the early proponents of the growth investing strategy. Today Buffett describes his investment style as 85% Benjamin Graham (value) and 15% Phil Fisher (growth). Buffett invests in companies with sound balance sheets, sound management and have moats around them.

BUY-AND-HOLD STRATEGY: Buffett is also a buy-and-hold investor, hanging on to stocks for years and even decades. However, there are notable exceptions. In 2022, Buffett dumped Bristol Myers and Royalty Pharma, not long after buying them for the first time. The prior year, he sold Biogen, Merck, Teva Pharmaceuticals and Merck spinoff Organon, not long after opening stakes in those companies. In 2020 he bought and quickly sold Pfizer. He clearly decided to exit drug stocks. In 2020 he bought Barrick Gold and sold it in February 2021. He bought (in 2016) and sold all his airline stocks in 2020 when the coronavirus hit global air travel.

CURRENT PORTFOLIO AND CASH: In Warren Buffett’s current portfolio as of 31 December 2022, the top 5 holdings are: Apple: Value $116 billion, Bank of America: Value $33 billion, Chevron: Value $30 billion, Coca-Cola: Value $25 billion, and American Express: Value $22 billion. Cash on hand, available within one year, amounted to $36 billion, a decline of 60% relative to the previous year.

REPORT CARD: Buffett writes: “A report card from me is appropriate: In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favours long-term investors such as Berkshire.” He adds: “It is crucial to understand that stocks often trade at truly foolish prices, both high and low. Efficient markets exist only in textbooks.”

DIVIDENDS – THE SECRET SAUCE: In 1994 Buffett completed his seven-year purchase of 400 million Coca-Cola shares for $1.3 billion. In 2022 the dividend received amounted to $704 million, and the value of the shares increased to $25 billion. American Express is much the same story. The purchases of Amex were completed in 1995. The cost was the same as that of Coca-Cola, $1.3 billion. Annual dividends have grown to $302 million. The value of the shares has increased to $22 billion.

DIVIDENDS INCOME: While Berkshire Hathaway does not pay dividends, Buffett prefers to invest in companies that do pay dividends. The annual dividends collected are around $6.1 billion. Just five holdings account for 71% of dividends received. They are Chevron ($908 million), Bank of America ($909 million), Occidental Petroleum ($898 million), Apple ($840 million) and Coca-Cola ($704 million). Buffett says: “Assume, for a moment, I had made a similarly sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.”

SHARE BUYBACKS: One of Buffett’s strategies is to buy back shares. It is a great strategy if the shares are bought back at prices below its intrinsic value. The result will be that the intrinsic value of the outstanding shares will increase a little bit. Apple and Amex also bought back shares, also increasing their intrinsic values. This benefitted Berkshire indirectly without costing it a cent. When you have idle cash on your balance sheet you have two options, pay dividends, or buy back shares. Buffett does not pay dividends; he prefers to buy back shares.

BOTTOM LINE: Buffett’s eleven page 2022 letter is a must read. How does Buffett explain his success? He wrote: “I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So, I do more reading and thinking and make fewer impulse decisions than most people in business.” He adds: “Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.” Finally he says that nothing beats having a great partner like Charlie Munger. Investing is not for everyone. If you want to invest, contact one of our consultants. They will take the sting out of investing.